In this article, I will share how to start real estate investing from the Real Book of Real Estate by Robert Kiyosaki as a summary. He says:
- Real estate is a business and should run like a business.
Otherwise, it will become just an average investment, and you know no average business can make you ultra-rich.
Real estate investment is a very lucrative business in every major country. So lucrative that everyone wants to be a part of it. Here are the five pillars of real estate investing that you must follow to give a cracking start.
The Real Book of Real Estate Book by Robert Kiyosaki Summary
Before you read further, I want you to take notes. Because this might be the blueprint for your real estate investment journey. Read it till the end, and you will discover the hidden formulas of real estate investing.
Table of Contents
1. Create A Real Estate Investment Strategy
Robert says very strongly in the real book of real estate, that you should first create an investment strategy, a plan that will help you imagine your goal. A strategy is a simple plan which helps to complete a specific goal, the goal you always want to achieve. To create a good strategy you must follow these six steps.
Imagine What You Want
The first thing Robert says in his best-selling book the real book of real estate is to imagine what you want from this real estate investment. Where do you want to go this day on? Imagine it.
For example, I want to spend more time with my family, help others, and achieve complete financial freedom before age 30. Decide now and imagine it. Take a deep breath and feel it in your mind. Just imagine.
Your Personal Financial Goals
To achieve that goal, how much money or wealth do you need or the amount of cash flow you need every month. Fix a deadline to achieve that goal and write it down.
Now, look at how much you have right now. I mean your current net worth.
- Net worth= Total asset — Total liability
If you are a fan of Robert Kiyosaki’s books, then you know what is an Asset and a Liability that Robert also explained this in more detail in the real book of real estate.
An asset that puts money in your pocket and a liability that takes money out of your pocket. Know the difference.
Your house or your car is not an asset. It’s all liability because it’s taking money out of your pocket every month (as Robert Kiyosaki says in the real book of real estate). Now, target the cash flow.
The Cash Flow Target
To reach your financial destination, how much wealth do you need. For example, I need $20M worth of assets and $1M cash flow annually.
Yours might be different, but you must target it. Your target must be believable to you. Otherwise, it will remain just like a dream.
Your Current Wealth Status
Create a wealth strategy according to your net worth. For example, my net worth is $5M. After five years, my net worth will be $50M and $3M in cash flow per annum. First, measure it where you have to hit and then go for it.
Your Investment Niche
An investor only becomes successful when he loves his investment. Some real estate investors invest in single-family apartments, some in multifamily apartments, and some in commercial or office buildings.
Choose the niche that you like the most, that you enjoy the most. That is the only way you can become a leader in your field. That is what a niche means.
It is the last step of an investment strategy and the ultimate blueprint. The Criteria is something that sticks with you all the time. If a particular investment doesn’t match your criteria, you will not invest. No matter how good the investment is, you will not.
For example, I will invest if:
- Minimum appreciation = 10%.
- A minimum rate of return = 50%
- Minimum price range = Below $500,000
- Location = Eastern US
Every investor has criteria as Robert Kiyosaki said in his book the real book of real estate. Many investors have more than 50 lists of criteria. It depends on the investor how he likes to invest. So, have a complete plan to handle all of your real estate investment. Remember, this is the path and blueprint of your success.
2. Build the Best Real Estate Team
I have read almost all the books Robert Kiyosaki has written, and in all of them, he mentions one thing that he also mentioned in the real book of real estate: real experts, real stories, real life that is to have a Qualified Real Estate Team.
A good business owner knows very well the value of a good team. A team who can become the best leverage for you will help you achieve your goals and dreams on time.
You can use their time, talent, knowledge, and resources to your advantage and upgrade your business. But, choose your team wisely. It may break your business apart. Find and select each individual wisely.
Here are some proven steps to create a great real estate team.
Your Team Game Plan
Think accurately about what skills you need, an attorney, a CPA, a property manager, or anything else. First, select the skills you need the most, and then select the person who fits well in your team.
Get Some Referrals
Most of the time, a good team member comes via referral who you trust or who is a friend of yours. The referral is the best stable way to get a good team member. Use it.
Make the agreement super clear for both of you. What you want from the other person and what he wants from you. Hide nothing. Make it super clear. Because in a team, trust is the most important factor. Build your team wisely.
3. Do the Best Real Estate Accounting Possible
You may be thinking accounting is the basics of managing taxes! Indeed it is. Good accounting will lead you to good reports, and a good report will ultimately lead you to good decisions.
And you know a simple description can make or break your investment. So choose wisely.
Here are three proven methods to do the best accounting possible.
The game of numbers. If you don’t have the data and the numbers, then the accounting will not be as accurate as you need it to be.
How do you know whether to sell the property, refinance it or buy it? What property is performing well and what is not? Are you losing money? If yes, where? How can you answer those?
The answer is purposeful accounting. In every accounting, you should have a clear goal that will give you the best data possible. The data will help you make a good decision over it.
You can answer those questions by purposeful accounting.
Do the bookkeeping accurately, which will help you do a good analysis and a great report. Entry everything in your journals, credits, debts, assets, liabilities, received money, sent money, everything. Make everything count.
Nowadays, we have software to do the work. A good one is Quickbook. It provides everything you need to do accurate bookkeeping. You can use chars, you can use journals, and you can enter data in various places. Overall, it’s a great software to have as a real estate investor. Use it.
Consistency and Frequency
Show some consistency in your bookkeeping every week. It will not take even an hour. Do not procrastinate, as I will do it later. Fix a date Saturday at 8 PM and do it, leaving any other work behind.
One more tip when you do the accounting
Robert Kiyosaki says in his book the real book of real estate, do not put every property in the same file. Give them a class:
- Class A
- Class B
- Class C
- Class D
That way, you can track every property accurately. Now it’s time to create the report.
4. Create A Good Report
You have heard this saying:
- If you don’t know your numbers, you don’t know your business.
Because in real estate, the numbers matter the most, $100,000, $500,000, $1M, $10M. Reporting is a simple measurement of day-to-day work where you can measure and analyze property data based on good accounting.
Read also: Gary Keller’s masterpiece book SHIFT
There are mainly three types of reporting that you should know.
Those who don’t know their numbers don’t know their business. Robert explained this very accurately in the real book of real estate.
The Statement of Cash Flow
In real estate, cash flow is the king. Know how much money a single property is generating every month or how much money all of your property is generating.
The basic theory of cash flow is, where is the cash flowing? From where it’s coming and where it’s leaving. The game of cash flow starts with the net operating income where:
- Net Operating Income (NOI)= Rents- Expenses.
Expenses mean repair costs, maintenance costs, management costs, etc. It will tell you if the property is generating a positive cash flow or negative cash flow. If the answer is negative, it will be wise to sell it. But do the research first.
Market Ratio Analysis
In ratio analysis a lot of things you need to keep in mind i.e
- Capitalization Rate (Cap Rate)
- Return on Investment (ROI)
- Current Ratio
- Debt to Equity Ratio
- This percentage will tell you some specific things.
- The cap rate will tell you how much money you are earning annually?
- ROI will tell you the total return on your investment.
- You can have the Cap rate and ROI by dividing the Numerator by the Denominator.
So the Cap Rate is:
- Cap Rate= Net Operating Income/ Property Value
In this whole ratio, the most important factors are Caprate and ROI. If a property’s Cap rate is below 5%, and the property is generating negative cash flow, you should sell it.
If the total ROI is below 30% after all taxes, then you should sell it. But, every investor has different criteria. Someone’s Cap rate is 5 or 7. Someone’s ROI is 30% or 50%. It depends on the investor and how he thinks.
Comparison of Property Values
Compare the actual value of the property with your expected value. For example, you think the value will increase at a rate of 10% every year. But in reality, it’s 15%.
It will tell you if your investment performing well? And what to do about it? You also can compare it with your past performance to do the work that works the best.
So a report is mandatory to manage, analyze, and make a good description of your real estate investment. Now the last one taxes.
5. Manage Your Real Estate taxes
The most investor always says this:
- The faster way to increase your ROI is to have total control over the taxes.
For most investors, the tax is the mother of all expenses.
- Income taxes
- Property taxes
- Sales taxes
- Employee taxes
- Transfer taxes
- Estate taxes
An investor pays about 30–50% money via taxes, but you can reduce it to 20%. Some investors pay a 0% tax on their investment legally.
Just think, if you can use those 30% (50–20=30) tax-free money in your investment, how fast would your portfolio grow, and how fast will you be able to make the change?
Here are five tips to reduce your taxes to a minimum level
The last thing Robert says in the real book of real estate is to save more property taxes as much as possible. Taxes are the biggest expense in real estate investment. You have to save them.
Build a Tax Strategy
Create a plan from where you want to reduce the taxes. For example, you have bought a restaurant. You have to pay the taxes on it, approx 30–40%.
But if you share the ownership with someone else, maybe with your wife or a partner, you will pay less tax. Create a tax strategy. Hire a good tax advisor who will help you to reduce your taxes.
Develop an Entity Structure
It tells you what type of entry you should use for your real estate business registration. Because the type of registration you choose will have a good effect on your tax expense. Entities like:
- Limited Liability Company (LLC)
If your main focus is on taxes and asset protection, then you must go for the LLC. Never choose a corporation for tax benefits, either ‘C’ or S. Because here, you have to pay more tax than an LLC.
Take Benefits from Travels, Meals, and Entertainments
Always pay bills from your business account, not from your personal bank account. I mean credit cards. If you use your business account, you can show the expenses as business expenses. You will gain some tax benefit over it.
But the problem is the IT Department (Income Tax Department) will not approve it unless it’s accurate. That’s why you need a claimable document.
Do the Documentation
The IT department has the power to say no to all of your expenses. Good accounting can solve this problem. You should note every expense down from a to z that you spend on your journey. For example:
- Who were you with that day?
- Where did you go?
- Hotel costs?
- Traveling cost?
- Why do you make a business trip?
Put everything in there. You will pay less tax. But for most people, it’s too personal. That’s why they pay it via their bank account. It depends on you. But if you reveal those, you shall pay less in taxes.
Apply Depreciation Law
It is a great way to pay no tax on your cash flow gain. It is like magic. Suppose you bought a $5M property, you put it on rent. You used only $1M of your own money and $4M from the bank.
For that loan, you will pay less tax on it. But the magic is you will not get the benefit of just $1M. You will gain the benefits overall of $5M. That’s why investors borrow money from others to reduce taxes.
It will reduce your taxes by more than 30%. But how can I make it zero? For that matter, you need to apply the Cost Segregation method. It is the work of your accountant. He will remove every unnecessary thing from that property, a false wall, a false ceiling, etc.
It can help you depreciate the tax more and more, sometimes even to zero. Contact your tax account and an attorney to understand these principles better before applying them.
Robert says many times in his best selling book the real book of real estate:
- Real estate is a business and should be run like a business.
So, here is the real book of real estate book summary by Robert Kiyosaki. I hope this gives you the answer you need, how to start in real estate investing. So, in Summary:
- Create An Investment Strategy
- Build the Best Team
- Do the Best Accounting Possible
- Create A Good Report and
- Manage Your Taxes
Share this article to help others. Thanks for reading till the end.
How to invest like Robert Kiyosaki?
Follow Robert Kiyosaki’s 100:10:3:1 rules that say to analyze 100 properties, select 10, finalize 3, and buy just one.
What is asset and liability?
According to Robert Kiyosaki, an asset that puts money in your pocket, and a liability that takes money out of your pocket.
What is the real book of real estate all about?
The book is all about the real-life experience of the top 20 friends of Robert Kiyosaki and how they made their money investing in real estate.
How to build an investment strategy?
Imagine what you want, set a financial goal, target your annual cash flow, create a balance sheet, and then build investment plans based on your criteria.
How to build a real estate team?
First, select the skills you need the most like an attorney, a CPA, or a property manager, and then select the person who fits well in your team.